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KPMG: Barometer assesses fraud risk when investing in Africa

KPMG has released the findings of the second Africa Fraud Barometer. The Africa Fraud Barometer has been developed to provide a bigger picture of fraud prevalence on the African continent.

Key points:

KPMG has released the findings of the second Africa Fraud Barometer. The initiative was launched in April 2012 and is an early stage effort to measure fraud on the African continent and expose the risk of fraud for companies in their day-to-day operations. According to the tool, reported cases of fraud decreased from 520 in the second half of 2011 to 503 cases in the first half of 2012. In the same period, the value of fraud decreased from US$3.3 billion to US$ 2 billion. Nigeria, Kenya, Zimbabwe and South Africa make up 74 percent of all fraud cases reported in Africa. While fewer cases are reported in South Africa, the overall value of these cases is far greater in Nigeria.

The Africa Fraud Barometer has been developed to provide a bigger picture of fraud prevalence on the African continent. “This is only the second barometer we are publishing, but we have noticed a decline both in terms of reported fraud cases and their monetary value. We see this as a positive trend,” says Petrus Marais, KPMG's Global Leader of Forensics, who developed the barometer.

“There is an increasing interest in Africa as an investment destination, but the continent struggles with a rather negative image. We are providing an analysis of fraud profiles in individual African countries to foreign investors since a generic approach to assessing fraud risks on the continent is not possible. The overriding point is that investors need to assess the prevailing environment in each country.” The Barometer distinguishes between the number of reported fraud cases, type of perpetrators, victims of fraud, type of fraud, countries and targeted industries. Data currently available captures the entire year of 2011 and the first half of 2012. To obtain some indications of trends, findings from the first six months of 2012 were compared to those ones of the second half of 2011.

This updated KPMG Fraud Barometer shows that fraud and misrepresentation had the highest reported cases at 37 percent, a decrease of 10 percent from the previous six months. Most fraud is committed by government officials (18 percent), followed by business people (15 percent) and employees (14 percent). As in the previous reporting period, government at 38 percent is still hardest hit by fraud and corruption, an increase of 1 percent. “We have identified government as a high risk area both in terms of perpetrator and victim. We therefore added a new perpetrator category of 'government officials'. It would seem from the statistic that government is under attack from its own people. Elsewhere in the world similar surveys show that companies are under attack from management more than employees,” says Marais.

“We are asking ourselves about the extent of prosecution of fraudulent government officials. This would depend on whether the respective legislation to prosecute fraud is in place and the capacity to implement the law exists. Cultural acceptability of fraud is also an important consideration.” In the private sector, multinationals are increasingly exploring ways of addressing internal fraudulent activities. Since international and local legislation has been put into place, the consequences for companies are far greater than ever before.

South Africa

South Africa has the highest number of reported fraud cases on the African continent, and due to the size of its economy more fraud cases are to be expected. The same can be observed in Nigeria and Kenya. A vigilant media, the essential basis for the entire Africa Fraud Barometer, is particularly in South Africa contributing to the reporting of fraud and corruption cases. Recent police statistics show positive trends, reporting that fraudulent activities are declining.

“On the positive side, we have also seen multinational legislation against fraud taking root in South Africa, forcing companies to be more accountable regarding fraud and corruption,” says Marais. “They have to defend themselves and the potential impact on market capitalization can be substantial. The legislation helps to constantly measure awareness of risks and to manage the risks themselves pertaining operations of companies in South Africa and into Africa.”

As for the public sector, more cases of fraud and corruption in South Africa have been reported on, with the Public Prosecutor playing a vital and important role. However, the prosecution rate remains comparatively low.

Zimbabwe/Central Africa

In Zimbabwe, fraud has been increasing especially after the dollarisation of the economy. “With the dollarisation, the basic economic fundamentals started to apply, resulting in significantly reduced income streams for certain classes of the society who were engaged mainly in the informal sector where returns were quite significant” says Emilia Chisango, partner at KPMG Zimbabwe. “Those with reduced sources of income tend to resort to fraudulent activities to sustain their lifestyles.”

There is a lot of procurement fraud where process custodians inflate prices for personal benefit. In some cases custodians of financial records fraudulently misrepresent reported figures to the regulators. Also, due to the tight liquidity in the market, there has been significant mushrooming of fraudulent microfinance institutions that lend money at inflated interest rates and in turn accept deposits at attractive interest rates. While there are a number of genuine such institutions, fraudsters have preyed on this by purporting to own microfinance institutions and offering rates which are significantly higher than the market. Once they collect a sizeable amount of deposits they often disappear with it altogether.

“There are more fraudulent transactions involving individuals, though the ones where companies are affected tend to be of significantly higher values. We believe that the level of reported cases is actually indicative of the actual levels of fraud happening in the country,” notes Chisango. Currently, the government is not directly addressing fraud as there is no known targeted response. However, business has stepped up awareness of fraud and fraud prevention through workshops. Frauds are normally reported on as the media has a huge appetite to report on them openly.

Kenya/East Africa

In the East African region, Kenya in standing out with 7.75 percent of reported fraud cases, well ahead of Uganda (2.98 percent) and Tanzania (2.78 percent). Most fraud in Kenya targets government and financial sectors as elsewhere on the continent. “Fraud and misappropriation is high, as is bribery and corruption. But we believe that a lot of cases are never reported,” says William Oelofse, KPMG's East Africa Director responsible for Forensic Services. “People are reluctant to report fraud since they do not have faith in the system from a prosecution and conviction perspective and do not want to jeopardize their businesses and brands. But there is a lot more reporting than in the past.”

Kenya has recently become more serious about fraud prevention. The conviction of former Tourism permanent secretary and Kenya Tourism Board (KTB) ex-managing director was hailed as a major success. Both government officials were convicted of conspiracy to defraud the ministry of Sh8.4 million (about US$100,000). They received heavy jail sentences and fines for misappropriating public funds.

“As for the other countries in the region, fraud cases in Uganda and Tanzania should also be high but people do not seem to be comfortable reporting cases,” says Oelofse. “A positive example is Rwanda where fraud has dropped to an all-time low.”

Nigeria/West Africa

Nigeria experiences high levels of fraud and corruption, a legacy stemming from the military era which lasted until the elections in 1999. The oil sectors also exacerbate fraud and corruption. Most types of fraud in the country are bribes in the private and public sector, misappropriation, and contract inflation. Holders of public office and senior management in the private sector commit most fraud, victimising, company shareholders and the general population.

Nigeria's media reports consistently on various fraud cases. Often cases are taken up by the legal system of the country. “There have been a lot of cases involving the banking and the Oil &Gas sectors or government that lead to prosecution. The current noticeable trend is that many cases either end with a plea bargain or are simply closed without any conviction,” according to Olumide Olayinka, Head of Risk Consulting of KPMG Nigeria. “The general belief in Nigeria is that the legal system is not effective enough.”

In the West African region, oil was recently discovered in Ghana, nurturing a sense that the level of fraud and corruption issues from Nigeria may be replicated there. “Public opinion is that fraud and corruption in Nigeria is increasing and that may spill over into other countries in the region,” says Olayinka.

The data for the Africa Fraud Barometer is compiled by analysing available news articles and reviewing fraud cases from designated databases. Updates are disseminated by press release every six months. “It is too early to determine whether the positive trend will be sustained, but over time we are expecting to get a stronger picture of the different types of fraud. This will allow us to provide better advice to potential investors which will economically benefit the continent in the long term,” concludes Marais.

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